Two recent purchases of Washington state growers and packers of apples and other tree fruit signal a trend that will continue, according to industry and financial experts.
Broetje Orchards, one of the state’s biggest family-owned and operated apple companies, has been sold.
Broetje Orchards LLC, FirstFruits Marketing of Washington LLC, and Snake River Housing Inc. were involved in the purchase.
The Tri-City Herald estimated the value of the real estate alone — more than 6,000 acres of fruit orchards — was nearly $300 million, but no purchase details were disclosed.
The business will be operated by three new entities: FirstFruits Farms LLC, FirstFruits Marketing LLC; and FirstFruits Community LLC, according to a news release.
Ralph and Cheryl Broetje founded Broetje Orchards more than 35 years ago, and it now grows, packs and ships close to 7 million boxes of apples a year, according to the release.
The new owner, the Ontario Teachers’ Pension Plan, plans a seamless transition to avoid disruptions for employees and customers.
Jim Hazen, former business manager at Broetje Orchards, is CEO and president of the new company, FirstFruits Farms LLC, and Chuck Zeutenhorst is general manager.
Another large-scale purchase involving Washington apple companies happened about the same time as the Broetje Orchards deal.
International Farming Corp. of North Carolina acquired Legacy Fruit Packers, Valley Fruit, and Larson Fruit, all of Yakima Valley. The combined companies are known as Columbia River Orchards.
The acquisition includes 4,000 acres of orchards and two packing facilities that handle about 4 million boxes of fruit annually.
The purchase includes interests in Sage Fruit, Yakima; and Pacific Coast Cherry Packers, Wapato, according to a news release.
The Land Report earlier reported Microsoft co-founder Bill Gates paid $171 million last fall to acquire approximately 14,500 acres of farmland in southern Washington.
Reasons to move
Pension funds are looking at ways to diversify risk, said Desmond O’Rourke, president of Belrose Inc., Pullman, Wash.
“If you are looking at return per-acre, certainly the return the potential on irrigated cropland is so much higher than the potential on dryland,” he said. O’Rourke said family-owned businesses must decide whether the next generation wants to lead companies into the future. What’s more, large chain store buyers make it essential to maximize economies of scale.
“Marketers are all trying to position themselves so that they are the one that’s chosen to be the supplier to Walmart, Costco, Kroger, the big boys,” he said.
Consolidation is a long-term trend that will continue, said Steve Lutz, vice president of U.S. and Canada West for the Produce Marketing Association.
“You can’t have 100 people selling to half a dozen buyers,” he said.
O’Rourke said the quality of competition in the apple industry also is becoming more and more sophisticated and consumer-focused.
Having the right varieties, packaging, effective promotions and social media excellence is important, he said.
“You have got to have the whole package, and the whole package depends on getting in with a good retailer,“ he said. With costs of $40,000 to $50,000 per acre or more to plant an orchard, capital needs also dictate investment by other companies, O’Rourke said. High-tech packing houses also require big investments. Packing costs alone for Honeycrisp can run as much as $14 per carton, he said.
“Unless you’re generating enough capital internally, you have got to go outside to find it,” he said. Producing the right range of sizes of extra fancy fruit — between size 80s to 113s — can earn growers and marketers a lot of money. “If a lot of them are either larger or smaller, you are in trouble,” he said. Older orchards start to produce smaller fruit, he said, which hurts profitability.
Potential buyers/investors of farmland include insurance companies, pension funds, endowments, said Michael Butler, co-founder and CEO of Cascadia Capital, Seattle.
“Heavy assets” such as land, appreciate in value over time, he said.
“You have got a few — not a lot — but a few private equity funds that are set up to buy ag firms and some of the family offices (wealthy private investors) are showing interest,” he said.
Butler said many Northwest grower-packers face stress on their balance sheets, made worse by retaliatory tariffs on U.S. cherries to China last year.
“What’s really killed these guys is cherries have gotten just clobbered,” he said, noting the effect of a tariff on sales to Asia.
That could motivate some growers to seek outside funding.“I think the smart ones are saying I better do something now because the risk is (going) to get worse,” he said. “I think the ones that get to market early will probably get decent prices,” he said. Companies who sell to outside investors are more valuable if management stays on, he said.
“The ones where the seller says, ‘Here are the keys, we are out of here,’ that’s much more challenging because it’s not easy to get people to run these businesses.”
Butler said the challenge for fruit suppliers is to increase their market share to 20% to 25%, to have more leverage to counter big retail buyers such as Walmart and Kroger, Currently, many suppliers are in the range of 6% to 12% of the market.
“There is handful of big, big buyers and they call the shots, and that’s why the industry’s got to consolidate down to four or five or six major players — so they have the power to compete against their customers,” he said.
Butler believes there will be more deals and consolidation this year among Northwest fruit players “without question.”